Australian manufacturing back in the spotlight

Along with the cost of living, Australian manufacturing was touted as being front and centre of this year’s Federal Budget with the Future Made in Australia (FMIA) Act.

In this insight, we welcome manufacturing’s return to the spotlight and explore what impact the measures announced in the budget might have on the future of the sector in Australia.

A future made in Australia?

FMIA brings a myriad of programs, most of which have been previously announced, under one banner. These are outlined in this insight from our 2024 Federal Budget analysis. While many of the initiatives lack detail at this stage, we understand the act will set out guiding principles to shape when and how government investment in the sector will be allocated.

As a package, FMIA has been allocated more than $22.7 billion until 2040-41, with focuses on the renewable energy sector and the transition to green and advanced manufacturing.

While it includes some good initiatives, such as the Production Tax Credit (PTC), which we welcome, we do wonder how much impact they will ultimately have on the broader sector.

FMIA, and the budget more broadly, does little to address power prices, red tape, and labour costs, which so many in the sector are currently hamstrung by. This is particularly true of small and medium manufacturers operating outside the Federal Government’s seven priority areas.

Manufacturing’s return to the national agenda

The commentary on manufacturing in Australia over recent years has largely focused on its decline, particularly since automotive manufacturing has all but left the country. With the exception of some programs—the Modern Manufacturing Initiative, for example—the sector has spent significant time off the national policy agenda.

Ultimately, the impact of global events over the past few years and international competition have resulted in manufacturing’s return to the spotlight. Supply chain disruptions through COVID and geopolitical uncertainty have highlighted the importance of strengthening our sovereign capabilities across various sectors, including manufacturing.

Combined with the introduction of on-shoring and re-shoring initiatives in other countries - including Canada, the EU, China, Japan, South Korea, Indonesia and the US$394 billion US Inflation Reduction Act - the government had little choice but to act if Australia is to keep pace and remain internationally competitive.

This budget, if nothing else, brings manufacturing back into the national conversation and will hopefully help change the dialogue around the sector, highlighting its vital role in our national economic security.

Has the government taken the right approach?

While there’s a long-term debate about whether the government should intervene in industry, it’s clear that without assistance, Australian manufacturing would certainly struggle to compete globally and perhaps to survive at all.

So, putting aside the intervention discussion, do these measures employ suitable mechanisms and are they targeted correctly?

Targeting renewables makes sense

The FMIA emphasis on clean energy and critical minerals has seen some accuse the government of ‘picking winners’. While we would have been happy to see more initiatives to support the broader manufacturing sector, it makes sense to focus on Australia’s comparative advantages for targeted support in the context of international competition.

As this sponsored article in the Australian Financial Review points out: “With abundant available space, Australia is conferred with natural advantages to produce green hydrogen and associated products such as ammonia.” According to Austrade, our pipeline of hydrogen projects is the largest in the world, with up to $300 billion of potential hydrogen investments in both domestic use and large-scale export projects.

Research commissioned by the Association of Mining and Exploration Companies identified that the cost of processing critical minerals in Australia would be at least 10 per cent higher than competing jurisdictions, and accordingly, without government subsidies, these projects are unlikely to attract investment.

Less emphasis on grant funding and more rigour

Whilst some government grant funding is available to the sector, particularly to small to medium enterprises (SMEs) under the Industry Growth Program (announced in the 2023 Federal Budget), most of the FMIA programs feature a mixture of equity, guarantees and loans. This approach, which represents less risk to taxpayer dollars, is welcome, as are initiatives to put more rigour around the allocation of funds, such as establishing an independent board for the National Reconstruction Fund (NRF) Corporation.

Skills and training are essential

The budget included several measures to address training and skills development, which will be critical to achieving the government’s ambitions for the sector. Increasing and diversifying the workforce pool by bringing more women into traditionally male-dominated manufacturing is also essential. As such, the Building Women’s Careers program and the expansion of the New Energy Apprenticeships Program are particularly welcome budget inclusions.

In focus: The Production Tax Credit (PTC)

We also welcome the introduction of the PTC to improve the economic viability of downstream critical mineral and hydrogen projects. This is similar to a measure in the US Inflation Reduction Act that includes US$30 billion in production tax credits to subsidise the refining of critical minerals and the development of downstream products.

The PTC is a less risky approach for the government than offering direct grants. Given the very high barrier to entry for critical mineral and hydrogen projects, particularly with regard to start-up and capital infrastructure costs, the PTC has suffered criticism that it subsidises projects of the mega-rich who can afford to act anyway. However, providing grants to entrepreneurs with unproven technology would be incredibly risky. If projects are unsuccessful, the PTC will not cost taxpayers a cent.

Accordingly, we would like a PTC expanded to other areas of the economy - helping to offset the comparative cost disadvantage of manufacturing in Australia and stimulating increased onshoring and reshoring of manufacturing.

Whilst the government has yet to release any details, the design of any PTC—whether for critical minerals or otherwise—must ensure that Australia is not breaching its trade or OECD Pillar Two (global minimum tax) obligations.

Australia needs to move quickly

A final observation regards our risk of falling behind other jurisdictions. No matter how welcome or laudable initiatives may be, they quickly become redundant if we’re too slow to act.

Recent history offers some cause for concern in this regard. The Industry Growth Program—which replaced the Entrepreneurs Program—has only just opened for grants 11 months after it was announced in last year’s budget. The NRF was announced in October 2022 but is only now taking expressions of interest for potential funding, and the PTC won’t come into effect until 2027-28—although we do acknowledge that projects are unlikely to be commercialised before then.

If the Federal Budget initiatives aim to secure Australia’s place in the competitive global economy, we must move quickly so funds can start having an impact as soon as possible.

Support for Australian manufacturing

While the budget initiatives for manufacturing aren’t perfect, and the total allocated funds are small by international standards, we are pleased to have Australian manufacturing back on the national agenda.

Any support for the sector as it undergoes a major transformation in the face of global competition is a welcome boost. We hope these measures are just a starting point, with more to come in the future.

Contact us to discuss the 2024 Federal Budget measures and what they mean for your business, or visit our manufacturing & wholesale pages to find out how we can help.